Global reversal strategy: equilibrium of endogenous trading?

What is it about?

In this paper, I examine the profitability of the reversal strategy internationally and find an economically essential and predictive reversal effect after considering the price reversal among countries’ indices as a global, coordinated, and generalized phenomenon. Indices’ portfolios form based on the prior 48 months; prior losers outperform prior winners by 8.86% per year during the subsequent 48 months. Interestingly, the reversal effect is substantially stronger for emerging countries, yielding 14.04% annually. It remains profitable in the period post-globalization, countering the concern of whether the integration of equity markets synchronized the price reversal worldwide. Returns’ differences consistent with portfolio formation approaches are also observed.

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